So far, we have covered a variety of ways to analyze a stock and inevitably reach an investment decision. Slowly you will begin to build your portfolio, where it might be helpful to begin employing some investing strategies.
Dollar-cost averaging is one of the most common strategies for investors. It’s like giving your investment account a monthly paycheck to spend on select stocks. The purpose of dollar-cost averaging is to set up recurring investments to reduce a teen investor’s average cost per share.
Average cost per share is as it sounds, the average cost of the stock you own. When you buy at several price points, you might buy two shares at $15 and half a share at $20. Then to determine what our average cost or cost basis will be we take the total value of the stock we own and divide it by the number of shares we have. In this case, it would be $16 ($30 + $10 / 2.5).
Additionally, dollar-cost averaging helps lighten the impact of volatility in a stock. For example, if one day you have $100 to spend on a volatile stock that is $20, you can buy 5 shares, but the following week the stock drops to $10. With dollar-cost averaging, you would be investing $10 a week into the stock. Through dollar-cost averaging your average cost would be $13.33 per share ($20 + $10 / 1.5) after two weeks, while it would be $20 if you decided to invest it all right away.
The dollar-cost average strategy is most frequently used by passive investors. A passive investor is someone who will often hold an investment for a long period of time with minimal trading activity. It can be extremely convenient and stress-free for an investor since you don’t have to worry about timing the market and know that you are consistently investing.
Now, how do you do this work on Bumper? Well, it is coming very soon. Stay tuned and start building out your portfolio to begin dollar-cost averaging!
The next strategy on deck, we have value investing, which is the secret behind Warren Buffet’s legendary investing career.